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Given its weak fundamentals and tepid outlook, we see little reason for investors to hold on to the stock of Brazilian state-run energy giant Petroleo Brasileiro S.A., or Petrobras (PBR - Analyst Report). We expect the company to continue to struggle based upon the number of near-term challenges that it faces.

Headquartered in Rio de Janeiro, Petrobras is the largest integrated energy firm in Brazil. The company’s activities include: the exploration, exploitation and production of oil from reservoir wells, shale and other rocks, and in the refining, processing, trade and transport of oil and oil products, natural gas and other fluid hydrocarbons, in addition to other energy-related activities.

In August, Petrobras reported its first quarterly loss in 13 years on the back of a weak domestic currency, rising costs and heavy fuel imports. Loss per ADR came in at 10 cents (1 ADR = 2 shares), contrary to the Zacks Consensus Estimate of 33 cents in profit. During the corresponding period last year, Petrobras earned $1.06 per ADR. Petrobras’ net operating revenues of $34.7 billion were down 9.4% from the second quarter 2011 level.

Petrobras – which aims to surpass Exxon Mobil Corporation (XOM - Analyst Report) by 2020 to become the world’s largest oil producer – has embarked on an ambitious investment program for the 2012-2016 period, totaling a massive $236.5 billion. This is expected to substantially increase the company’s leverage and deteriorate its credit metrics during the current downturn in the economic cycle. Additionally, the increasing capital intensity of its operations may result in reduced returns going forward.

Barclays to Acquire ING Direct UK

In an effort to further strengthen its domestic retail banking business, UK banking giant Barclays PLC (BCS - Analyst Report) has agreed to acquire the mortgages and deposits of ING Direct UK – the British online banking division of ING Groep NV (ING - Snapshot Report). The detailed financial terms of the deal were undisclosed.

The deal will bring in 1.5 million customers along with 750 employees, £10.9 billion ($17.47 billion) deposits and £5.6 billion ($8.98) mortgages under the Barclays umbrella. Barclays declared that it will be buying the mortgages at roughly 3% discount and the deposits at par. The deal is anticipated to be completed in the second quarter of 2013, subject to certain regulatory conditions.

Following the completion of the deal, Barclays will integrate the ING Direct UK business with its UK Retail and Business Banking division. However, until the integration is completed, Barclays will continue using ING Direct UK’s businesses to serve the customers under the same terms and conditions. Further, Barclays expects the deal to improve its return on equity.

Amidst the bleak macroeconomic environment, which is clouded with mounting regulatory restrictions, Barclays has witnessed a decline in profit in its investment-banking segment. The bank is in the process of conducting a strategic review to simplify its businesses, increase profitability and reduce its over-dependence on the investment-banking arm.

We believe the acquisition will help Barclays to improve its retail banking market share in UK. The abovementioned agreement is an addition to numerous deals by Barclays in the recent years, including the acquisitions of Standard Life Bank in 2009 and credit card division of Egg in 2011.

On the other hand, the sale of ING Groep NV’s UK division is a part of a series of asset sales that the company has been undertaking to pay back the bailout fund, which it took from the Dutch government during the 2008 financial crisis. Further, it is part of the company’s strategic aim to concentrate more on the core banking segments.

In August, ING announced the sale of ING Direct Canada – the Internet banking division of ING Bank of Canada – to The Bank Of Nova Scotia (BNS - Snapshot Report).

Barclays and ING Groep NV, both currently retain a Zacks #3 Rank, which translates into a short-term Hold rating.

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